Euro zone bank closure fund to have open borrowing capacity

Reuters Staff

3 Min Read

BRUSSELS, March 20 (Reuters) - The euro zone’s fund for financing the closure of failing banks will be able to borrow on the market or raise fresh funds from banks to replenish spent money to make sure it always has enough to do its job, officials and lawmakers said on Thursday.

European Union policymakers have agreed on how to set up an agency that would wind down collapsing banks and how to provide it with money to cover the costs of the closure.

The money will come from a fund filled by banks from annual contributions which is to reach 55 billion euros after eight years.

“The logic is that whatever the fund needs above what it has, it can borrow from the market. It will then get its money back from the banks and pay back the loans,” one senior euro zone official said.

The fund will not have access to the euro zone bailout fund or be given government guarantees, because that would indirectly expose euro zone taxpayers, officials said.

“There is no legal limit on the fund’s borrowing,” a second senior euro zone official said.

But if closing down a bank were to cost more money than the fund has, it could borrow it from the market. It would then pay back from contributions from banks that it would collect in the future, because taxpayer money will not be tapped.

“The more the fund is used, the more it has to be replenished,” said Sven Giegold, a German lawmaker involved in the negotiations.

He said there will, however, be provisions that act as a safety valve to prevent any overburdening of banks with extra levies.

Policymakers have agreed that two years after the creation of the fund next year, 60 percent of what all banks in the euro zone have paid in will be made available to all countries to finance potential bank closure expenses.

From then on, each year the amount of all accumulated contributions available to all euro zone countries will increase by 10 percent annually until all the contributions are fully mutualised after eight years.

ECB President Mario Draghi said that plans to allow the new ‘resolution’ or clean-up fund to borrow to top itself up looked promising.

“The point we’ve always made is that we need a mechanism that is properly funded, and the agreement actually improves the existing funding,” Draghi told journalists, adding that he had yet to see the details on how this would work. (Reporting By Jan Strupczewski, John O‘Donnell; Editing by Hugh Lawson)